On Thursday, the producer prices report surprised to the downside. The headline index, which includes energy and food, stayed flat for July, from a 0.3-percent increase in June. This result came on a drop in energy prices, which were apparently not (yet) offset by tariff-driven increases in other input prices, especially steel and electronics. The annual change also pulled back a bit. It went from 3.4 percent in June to 3.3 percent in July. Despite the decline, however, longer-term inflation pressures remain elevated above the Fed’s target range. The core index, which excludes energy and food, also pulled back. It showed a 0.1-percent gain in July, down from 0.3 percent in June; the annual figure was also down, from 2.8 percent to 2.7 percent. While these figures have pulled back on a monthly basis, under the surface, tariffs are reported to be driving faster input inflation—although this has not yet shown up in the aggregate figures.
Despite the pullback in producer-level inflation, on Thursday the consumer price reports showed modestly rising inflation at the headline level. The headline index, which again includes food and energy, rose by 0.2 percent in July. This result was up from 0.1 percent in June, with the annual figure steady at 2.9 percent. The core price index, on the other hand, stayed steady at 0.2 percent on the month, while the annual figure ticked up from 2.3 percent in June to 2.4 percent in July. As with the producer prices, these figures indicate inflation continues to run above the Fed’s target levels. This level should continue to drive interest rate increases, but it is not yet showing any material acceleration.
On Wednesday, retail sales are expected to show 0.1-percent growth for July, down from 0.5 percent in June, on a decline in gasoline prices and auto sales. There is some downside risk here. Auto sales at the manufacturer level have been quite weak, and that may have more of an effect on retail auto sales than anticipated. Core retail sales, which exclude autos, are expected to do much better. July’s growth should remain steady at 0.4 percent, the same as for June. Although core spending remains healthy, the slowdown in auto sales will most likely take overall spending down after the strong second quarter.
Also on Wednesday, the industrial production report is expected to pull back a bit. It is expected to go from a 0.6-percent gain for June, on an increase in oil drilling, to a 0.4-percent gain for July. An even bigger pullback, from a 0.8-percent gain in June to a 0.3-percent gain in July, is anticipated in manufacturing. This number would likely reflect a return to normalized production, after a bounce in June following a fire in May that had disrupted auto industry supply chains. As with retail sales, although these figures would be somewhat weaker than the previous month, they would still signal continued economic growth.
We will also get a look at the housing sector on Wednesday, when the National Association of Home Builders (NAHB) survey is released, and on Thursday, when the housing starts report is published. The NAHB survey is expected to tick down slightly, for the second month in a row, from 68 in July to 67 in August, on a lack of labor. Housing starts are expected to bounce back partially, to 1.27 million (annualized) in July, after a significant drop in June to 1.17 million. The data for both measures is likely to remain constrained by rising supply and weakening demand. If the numbers come in as anticipated, they will leave open the possibility that housing is slowing, as suggested by previous data.
Finally, the University of Michigan’s consumer sentiment survey, released on Friday, is expected to show confidence holding steady, at 97, from July to August. Historically, this is a high level. It suggests that consumers aren’t yet worried about the effects of a trade war, given a decline in gas prices and the recent stock market surge.
Have a great week!